Black money or legitimate export dollars: The big debate

It all seemed too good to be true. Between May and August last year, India's growth in exports rose at a dizzying pace every month. In July 2011, exports were $29.3 billion, 82% higher than a year earlier. 


Coming at a time when the world economy was widely seen to be slowing, what with unemployment in the US, and the problems in the eurozone, both key export markets for India, the export growth seemed an unexpected bonanza in an otherwise dismal economic climate. 

But serious doubts began to be raised about the numbers. There was near 80% export growth in sectors like engineering in 2010-11. And India's exports to certain tax havens didn't match the import figures reported by these countries.

Indeed it was the jump in transaction with countries like the Bahamas (a tax haven) which raised the suspicion that exporters were showing a higher value than what they actually received for their goods to camouflage the flow of black money stashed abroad back into the country.

The practice, known as mis-invoicing, has long been a standard practice to camouflage the movement of undisclosed cash across countries. But till recently, exporters were widely accused of under-invoicing. An exporter for instance may show Rs 5 for something that is really Rs 10, thus transferring export earnings to foreign accounts.

What exporters are being accused of now is actually trying to bring that undisclosed money back, by showing a higher value for their exports in their accounts than the true value, and inflating the export earnings. This is in the backdrop of increased government scrutiny of wealth stashed abroad.

There may well be errors in the export data, government officials are rechecking the numbers. Yet, there are compelling arguments to show that the export data 'scam' may not be as much of a 'scam' as earlier believed.

Galloping export growth amidst a weak global economy. It sounds more than a little fishy. Were exporters inflating their bills to bring back money stashed abroad earlier? 

Exports in the first half of 2011-12 grew by 44-82% every month, even as the global economy was weak. But rather than exporters cooking the books, there are more benign explanations. Those extraordinarily high figures were actually revised down later on, due to 'software' problems.

The government found a $9-billion error in export numbers reported in the April- November 2011 period due to miscalculations in the software. The revised export figures released this January show that the growth rates ranged from 23.7% to 60.8% till October. And as reported by The Economic Times earlier this week, the export numbers for 2010-11 may be revised down as well.

But there still seems to be a problem. After all July's export growth may not be 80%, but it's still 60%. Again, amidst a slowly growing global economy, that still seems far too high. Is there a way to cross-check these figures?

It sounds like a truism, but what India exports, another country imports. So here's one way to check the problem, if an indian exporter claims that he exported Rs 20-crore worth of car parts to, say, the US, it's possible to check US customs figures to see what the US customer told customs officials there, was it actually Rs 10 crore of car parts, Rs 30 crore? 

It's actually the latter. Imports from India as reported by India's partner countries (and compiled by the IMF) exceed exports reported by India by $1.46 billion and $4 billion in the first and second quarter of 2011 respectively. Also, imports from India reported by partner countries exceeded exports from India for each month up to August 2011. Thus, if anything, Indian exporters were claiming lower export figures, not higher. But since reported imports include costs of insurance and freight while exports exclude these items, these numbers aren't inconsistent.

Similar trends hold for 2010-11 as well which should dispel shadows of doubts being cast on India's high export growth rates reported in 2010-11. C Veeramani from Indira Gandhi Institute of Development Research (IGIDR) in a recently published Economic and Political Weekly (EPW) paper also shows that India's official export figures in 2010 were actually lower (mainly on account of freight and insurance costs) by $20 billion when compared to what the world as a whole had reported to the IMF as imports from India.

Moreover, the spikes and falls in the two series from 2002-10 match almost perfectly. "If there had been major problems with the official data, it wouldn't have picked up the trend as perfectly as reported by reporting partners," says Veeramani. The fact that the trends match also points to the fact that in general, India's official data collection mechanism may not be too error prone, he says. However, the government is taking a relook at at the numbers for this year and the previous one.

Earlier, Sajjid Chinnoy, India economist at JP Morgan, a financial services firm, had also concluded that "for calendar year 2010 and first quarter of 2011, there is not a single region where India's recorded exports are higher than partner region's recorded imports".

While he conceded that discrepancies in data do exist at the bilateral level, he says that the data mismatch between partner countries on the basis of IMF data has actually come down in 2010 as compared to 2002, when 25% of India's trading partners recorded lower imports than exports. In 2010, this figure was below 10%. This is due to systematic differences in trade reporting methods between countries.

Engineering exports grew 79% in 2010-11. But the largest engineering companies reported only a 11% growth in exports. Are the engineering export numbers for real? 

The problem is that the 22 listed engineering companies on the Bombay Stock Exchange represent only 20% of India's engineering exports according to the Federation of Indian Export Organisation (FIEO), the apex body of India's export promotion organisations.

The Kotak research report (which had first highlighted the disparity in numbers) had itself conceded that it is possible that the export growth in automobiles and metals for which data was suspect could be occurring at the small and medium companies' end, a fact that most sceptics chose to ignore.

"The rapid increase in engineering exports from MSMEs [micro, small and medium enterprises] is actually an eye opener and most of the large listed companies actually contribute insignificantly to exports as they cater mainly to the domestic market," says Ajay Sahai, director, FIEO.

One example he points to is that of auto components which witnessed a more than 35% export growth in 2010-11, all of which came from the small and medium sector. Even in the electronics sector, a lot of the export growth is taking place at the SME level. For instance, Deki Electronics, a Noida-based electronics components company says that it is only in the past two years that they witnessed a dramatic increase in exports from 10 to 25% of their turnover.

For sectors like petroleum (the fastest growing export sector which constitutes 17% of India's exports) where SMEs don't have a role to play, the exports reported by the companies matches almost perfectly with officially reported exports. In fact, IGIDR research shows that company reported data was actually $3.19 billion higher than official data in 2010-11. This provides further credence to the theory that without probing further into the export performance of SMEs, no conclusion about engineering export data can be made.

While the government reported a $15-billion error in engineering exports in the April-November 2011 period, the commerce ministry has also asked for the 2010-11 engineering export data to be looked at again. The government is also relooking at the inexplicably high growth rates in copper exports. According to a commerce ministry official, "We are relooking at the numbers and there may have been a mistake in the data collection." But there have been no results so far.

Exports to Bahamas surged to $2.2 billion in 2010-1 - a 1,000 fold jump in just two years. How did exports to a tax haven jump so dramatically? 

Based on data reported by all of Bahamas' trading partners to the IMF, Bahamas' total imports were estimated as $13.6 billion in 2010 billion (and not $2.8 billion as reported by Bahamas). This implies that the discrepancies in data are due to differences in definitions used to report trade data.

Petroleum consists of 90% of India's exports to the Bahamas. Veeramani points out that the IMF data manual states that the Bahamas doesn't report all products imported and exported that don't add to the wealth and material resources of the country. Companies like Reliance are using the Bahamas as a storing facility for their oil and this isn't getting reflected in Bahamas' own trade data as the oil is merely being re-exported to other countries.

However, this trade gets recorded in IMF data when all the partner countries report their exports to the Bahamas. In his EPW paper Veeramani says "...partner countries have reported petroleum exports worth $4.4 billion to the Bahamas in 2010, while the latter did not report any such imports". This implies that discrepancies in trade data with Bahamas are not unique to India and exist with other countries as well, mainly on account of oil exports.

In fact discrepancies in bilateral trade reported by partner countries has been a worldwide phenomena which India just seems to have awoken to. A 2010 UNDP report pointed to some of the reasons for widespread mismatches in data between countries as different price systems, different trade systems, and more importantly, the emerging issue of re-exports which is becoming common.

This happens when exports enter the customs of a country only to be shipped to further destinations. So when countries have different definitions on country of origin on the basis of which they report trade data with partner countries, discrepancies in data automatically emerge. For instance, the report gives re-exports via Hong Kong as plausible explanation for the persistent discrepancy in trade data between China and the US.

Exports and imports of container tonnage at ports have grown at a far slower pace than official export numbers. Why the difference? 

JP Morgan's Chinoy points out that these comparisons are wrong as export value data (in nominal terms) can't be compared to tonnage volume data (in real terms). When he compared container trade data (exports and imports) at major ports with real trade growth obtained from expenditure side GDP, the two are almost comparable at roughly 13%.

Moreover, according to Ajit Ranade, chief economist of Aditya Birla group, given the proliferation of private ports and increasing importance of air freight, no conclusions of export over-invoicing can be drawn on the basis of port traffic data anyway.

Given the new evidence, economists agree that the theory of export over-invoicing in the case of recent export figures is not a given. "There is now enough evidence to say that the export-overinvoicing theory is not credible," says KT Chacko, director, Indian Institute of Foreign Trade.

This is not to say of course, that problems don't exist, they certainly do, especially with the way the customs department collects export data. The $9-billion error in the April-November period also shows that the problems needn't be minor. But the 'black money' theory holds little water.

Countering the theory of export overinvoicing 

1) For all of 2010 and each month from March-August 2011, world imports from India as reported by the IMF exceeded India's exports to the world.

2) Listed engineering companies represent only 20% of India's engineering exports while the bulk is exported by SMEs. For sectors like petroleum where SMEs have no role to play, company reported export data matches almost perfectly with official figures.

3) Most of the Bahamas' oil imports are re-exported elsewhere. The Bahamas doesn't include these imports in its trade data. As a result, Bahamas reported $2.8 billion imports in 2010-11. But the IMF estimates it to be $13.6 billion, including re-exports.

4) Real trade growth from expenditure side GDP consistent with container trade data at major ports.

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